A ‘Pre-Pack’ Administration is governed by the same rules and statutory requirements as the more traditional type of Administration, but with one key difference. The sale of the business and any assets of the company is negotiated before the appointment of Administrators and is completed either immediately upon, or very shortly after, their appointment. Under the more conventional procedure, the Administrators would not start to market the business until after their appointment.
The process is best suited for companies which are insolvent, but have a business that is viable going forward which would either be damaged during the normal Administration process; or where there is insufficient funding to allow trading to continue during the time it would take for the Administrator to market it and complete a sale.
The upsides of a Pre-Pack Administration
A break in trading will inevitably have a detrimental effect in many industries. Trading during insolvency, however, may not be an option if no funding is available or suppliers will not cooperate; alternatively, it may not be possible to comply with regulatory requirements. A Pre-Pack Administration facilitates a quick and relatively smooth transfer of a business, allowing trading to continue uninterrupted.
The news of any form of insolvency almost invariably reduces the value of a business; customers, suppliers and employees may lose confidence and go elsewhere. This risk can be mitigated by completing a Pre-Pack sale before news of the insolvency reaches the marketplace.
Cutbacks and reduced trading operations in an Administration often result in job losses. Job preservation can be one of the main benefits of a Pre-Pack Administration. Avoiding redundancies and securing continued employment for the employees of the business is not only of benefit to the economy generally, but also to the general body of creditors, as it reduces the number and value of preferential and unsecured employee claims in the insolvency.
The costs associated with trading and supervising a business in insolvency can be significant, as can the professional costs of the Administrators and their expert advisers if trading continues for any length of time. In a Pre-Pack Administration, control of the business, its risks and the costs associated with it are transferred to the purchaser immediately or shortly after the appointment, so the Administrators can avoid incurring trading and related costs. The result should a better outcome for creditors.
The downsides of a Pre-Pack Administration
Lack of transparency
Though secured creditors will necessarily usually be consulted in advance; unsecured creditors will not usually be informed of a Pre-Pack Administration until after it has completed. Unsurprisingly, unsecured creditors can feel disenfranchised and are often deeply suspicious of the procedure. In order to give greater transparency to creditors, Statement of Insolvency Practice (SIP) 16 requires that the Administrators must disclose a broad range of explanatory information to creditors shortly after the completion of a Pre-Pack sale transaction.
Creditors can be concerned that the maximum value for the business and assets has not been achieved, as due to the nature and timing constraints of a Pre-Pack Administration, marketing opportunities are limited. The insolvency practitioners may try to test the market by identifying and contacting potential buyers; however, they will be unable to expose the business and the assets for sale on the open market. Instead, the insolvency practitioners will usually need to rely on independent valuations. Details of marketing activities and valuations obtained are included in the information that must be disclosed to creditors disclosed under the provisions of SIP 16.
Conflict of interest
The insolvency practitioners appointed as Administrators can be perceived as having a conflict of interest. They may have been approached by the directors of a company, who are already planning a Pre-Pack deal. Insolvency Practitioners acting as Administrators are, however, officers of the court and are unlikely to agree to be appointed if they disagree with the proposed approach. Before accepting an appointment, they will satisfy themselves that under the circumstances of their relationship with the directors, they can comply with their statutory duties, as well as that a Pre-Pack sale is the most appropriate course of action among the options available to the company.
There are two main kinds of Pre-Packs. The first is where the buyer is an independent third party, possibly a competitor. The second and much more problematical is where the sale is back to the directors via a new company under their control. These are sometimes described as ‘Phoenix Pre-Packs’. Given that the transaction is being concluded with a connected party, all of the above concerns are magnified. Such transactions will involve the insolvency practitioners conducting even more rigorous due diligence than the strict requirements of a third-party transaction in order to remove any negative perceptions surrounding the nature of the sale which is entirely in the best interests of the purchaser. As an additional safeguard, in recent years the ‘Pre-Pack Pool’ has been established to review connected party transactions before they occur, and provide its opinion on the proposed transaction to those parties involved.
Directors must beware continuing to trade on for too long while a Pre-Pack Administration is being planned and prepared. If creditor losses increase as a result and the Pre-Pack plan fails, they may be exposed to prosecution under the Wrongful Trading provisions of the Insolvency Act. (These are currently suspended for losses incurred during the Covid-19 emergency, but will be restored at in the future, other potential actions such as misfeasance also remain in place)
Re-use of the Company Name
If a Phoenix Pre-Pack plan involves trading after the sale under the name of the original company or one very similar and the original company is eventually put into Liquidation, either court approval or creditor engagement will be required to sanction this. Failure to do so will expose the directors to potential personal liability for some or all of the successor company’s unpaid debts if it also fails.
Step-by-step guide to a Pre-Pack Administration
- Cash flow pressure or threatened creditor enforcement has pushed the business to the point where it is insolvent within the meaning of the Insolvency Act
- A firm of licensed insolvency practitioners is contacted to advise on the situation. They perform a business and solvency assessment to identify the range of options
- Once a Pre-Pack Administration is decided upon, the insolvency practitioners will arrange for the independent professional valuation of the company’s assets and will prepare an Estimated Outcome Statement, which will usually compare the outcome for creditors expected from the Pre-Pack Administration with the alternative of Liquidation
- If business assets are to be sold to an existing company, the insolvency practitioners will satisfy themselves that the buyer has the necessary funds. Steps might include the provision of management accounts and other information by the buyer, or a binding confirmation from a credible independent source that the necessary funds are available
- Where a connected party is proposed as a purchaser, the directors will be advised that they should consider referring the matter to the ‘Pre Pack Pool’
- If the intention is to transfer the assets to a new company, the insolvency practitioners will expect to see fully integrated cash flow, trading and balance sheet forecasts demonstrating the viability of the new company and its ability to purchase the assets
- A business and asset sale agreement is drawn up and agreed by the insolvency practitioners’ lawyers and agreed with the purchaser
- The company is placed into Administration, which suspends all legal actions against it; the asset sale agreement is completed by the Administrators immediately or very soon afterwards
- The Administrators call a creditors meeting within 10 weeks of appointment, at which an explanation for taking this insolvency route is given, which will have been provided in a detailed Proposal report. Details of how the administration is expected to conclude will be provided, along with the anticipated outcome for creditors
- If realisations are sufficient to enable a return to creditors, usually the Administration will conclude with the company being placed into liquidation (often with the former Administrators being appointed as the Liquidators)
- The insolvency practitioners, now acting as Liquidators agree creditor claims and distribute the funds available in accordance with the insolvency legislation
Is a Pre-Pack Administration right for my business?
Despite the understandable concerns of certain stakeholders, the Pre-Pack Administration process is transparent in the right hands, and is carried out with rigorous ethical standards. Although normal marketing of the business is rarely possible, insolvency practitioners will often have ways to test the value of the business and the appetite for it. From that point on, transparency is essential. It can never be possible to satisfy all stakeholders, so preventing abuse of this procedure is our priority. It is one of the best ways to preserve value and facilitate business continuity for struggling enterprises.
We are licensed insolvency practitioners with considerable experience across the entire UK economy, well versed in carrying out successful Pre-Pack Administrations. We would be pleased to offer assistance if you feel that this procedure would help your business, or if you need more general guidance in these most difficult times for everyone engaged in the hurly burly of the commercial world.
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